If you’re contemplating using your self-managed super fund (SMSF) to invest in property, you’ll first need to decide whether residential or commercial is right for you. It may sound like a relatively straightforward decision, but there’s a lot to consider.

With the sole purpose of providing for retirement, SMSFs are frequently audited and laden with rigid rules and regulations. This doesn’t mean they’re ineffective, it means that if you want to invest in property using your SMSF, you’ll need to comply.


Commercial Considerations

With its attractive returns and tax incentives, direct property investments are one of the main reasons people choose to set up an SMSF.

Generally speaking, investing in commercial premises through an SMSF has some advantages over residential properties. The rules relating to holding residential property in an SMSF very clearly stipulate that the property can’t be rented or occupied by you or any other trustee. It also can’t be rented or occupied by any relation to the trustees. Investors who think they can purchase a holiday house in their SMSF to enjoy over the summer will need to think again; the rules are clear and strict. Investors who already own an existing residential property can’t transfer the property into an SMSF by acquiring it at market value or contributing it within the cap limits.

While commercial properties can be sold to an SMSF by its members, as well as being leased to SMSF trustees or an individual or business related to them, there are still a host of considerations.

Holding commercial properties in an SMSF is open to all SMSF trustees, not just small business owners. To purchase a commercial property in an SMSF, a fund may apply for a specific SMSF loan. However, the criteria are stricter than traditional lending with tighter loan to value ratios.

Commercial Cans and Can’ts

Rent is often considered dead money. Given that commercial property purchased through an SMSF can be leased back to the trustees, it makes sense that many choose to pay off their asset, and not a landlord’s.

When investing in commercial real estate, SMSF funds have the option of investing 100% into commercial premises if a member of the fund runs a business. This is an attractive proposition for small businesses who want to own the premises from which they operate.  Investors or businesses which already own a commercial property can contribute the property to the SMSF. The transaction will have to be at market value and is subject to the contribution caps. Keep in mind that transferring property may have capital gains, stamp duty and tax implications, so always get advice before making concrete plans.

When it comes to leasing the property to a related party, it must be done on the same terms as it would with an independent third party. If you were leasing to an independent third party, a lease arrangement needs to be in place, clearly outlining the terms and conditions of standard commercial agreements. Market rate rent will need to be paid regularly and physically into the SMSF bank, and the property will need to be periodically independently valued.

Continued Compliance

SMSFs need to value all of their assets at market value, and the valuation needs to be based on objective and verifiable data. If an SMSF holds commercial property, a real estate agent or registered valuer will need to provide an independent valuation.

If the commercial property produces a gross rental income in excess of $75,000 per annum, the fund will also need to register for GST.  Once the SMSF is registered for GST, it can claim 100% of GST on any expenses associated with the commercial property.

Once the property begins to produce a rental income, it will be taxed at 15%. If the property is sold (after owning it for more than 12 months), 10% capital gains tax will apply. If the SMSF is in pension phase and the sale fits within the member’s $1.6m balance cap, then no capital gains tax is payable.

Given its appeal for small business owners, commercial property continues to make a compelling case from a tax planning and long-term capital growth perspective. However, with all investments, there’s a flip side. Issues such as lack of investment diversity and liquidity considerations of holding one ‘lumpy asset’ needs to be weighed up when choosing commercial property for your SMSF.


H&R Block SMSF Solutions

Depending on your financial situation, a self-managed super fund (SMSF) can give you more control over your superannuation and retirement. With complicated rules and strict governance in place, those looking at investing in commercial property through their SMSF should always seek qualified and experienced advice.

The H&R Block SMSF Solutions team can provide you with a full range of SMSF services to help you set up, manage and maintain your SMSF. Talk to us today about planning your tomorrow.

 shridhar gupta 678685 unsplash 

Disclaimer: The information provided is general in nature, and as such it should not be relied upon for making decisions without seeking expert opinion or personal advice. H&R Block disclaims all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable, for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice provided. The user must accept sole responsibility associated with the use of the material in this article, irrespective of the purpose for which such use or results are implied. The information applies the law as stated at the time of writing, and is no substitute for financial advice.


Talk to a H&R Block SMSF expert today

H&R Block is an expert on a full range of SMSF services including establishing a new self managed super fund, buying property with an SMSF and meeting annual compliance and tax obligations.

Find out more

Talk to a H&R Block SMSF expert today

H&R Block is an expert on a full range of SMSF services including establishing a new self managed super fund, buying property with an SMSF and meeting annual compliance and tax obligations.

Find out more